The last 20 months have been fascinating for those of us who work in supply chain.
If you are like me, many of your friends and family never fully understood what you do for a living — until March 2020. Suddenly, everyone was hearing about the supply chain and asking millions of questions. After surviving 2020, consumers and businesses hoped for a return to “normal” in 2021, but that has brought even more challenges during the back half of the year. The news has been bombarded with labor scarcities, supply shortages and port congestion. Just today, in a shopping group that I follow on social media, participants were complaining about all the shortages, service issues and price increases, but obviously didn’t clearly understand the underlying situation. So, in preparation for the upcoming holidays with family and friends, I thought I’d share some key talking points to help explain the situation better to people who — unlike us — haven’t been living and breathing supply chain most of their adult lives.
Is it just a supply issue?
Hardly a day goes by without someone asking me when “it” is going to end. When will everything be available again? But is it just a supply issue? Yes, there are incredible constraints on supply. Most people understand that manufacturers have become more global over the past decade and import a considerable number of raw materials and finished goods from overseas. This strategy is based on driving efficiencies, but it does increase lead times, which can negatively impact an organization’s agility and flexibility. When COVID-19 first hit in 2020, it affected manufacturers across the world as shutdowns occurred globally and production was stopped. Consequently, supply was significantly delayed. Companies might have rebounded quicker if key materials were sourced or manufactured locally, but alternatives were limited as the pandemic spread across the world and all regions were impacted at some point.
It started with supply but was compounded by unprecedented demand change.
Outside of the panic buying that occurred at the onset of the pandemic, your friends and family may not be aware of just how much demand has changed in the past 20 months. The other fact they may not understand is that manufacturers have finite capacity — and often don’t have the ability to increase that capacity significantly if demand spikes dramatically. Most capital investments must be budgeted and can take time to implement. Most consumer product companies have excess capacity to cover some upside, but what we experienced with COVID-19 is something never seen before.
The COVID-19 lockdowns globally caused a major shift in demand. Spending previously made on services, such as entertainment and travel, shifted overnight to physical goods. Instead of spending on vacations (hotels, amusement parks, transportation), sporting events and eating out, consumers began buying products to support this new “socially distant” lifestyle. Demand for some items soared way beyond their normal activity. People couldn’t go to gyms or fitness classes, so demand for equipment to use at home skyrocketed — they waited months for Peloton bikes and free weights that were out of stock everywhere. With kids home, parents were buying recreational toys for use around the house, as well as computers and tablets for online learning. In-home food and beverage demand increased dramatically, as people were cooking at home more than before. Even as lockdowns relaxed, a large percentage of people were continuing to work from home (and still are) and focusing on home improvement, which drives a huge demand in durable goods — including building products, appliances and furniture — most of which have very long supply chains. All this increased demand triggered the need to produce more products and more raw materials up the supply chain.
It’s the classic bullwhip effect — but across ecosystems.
If you studied supply chain in school, you probably know what the bullwhip effect is. Prior to Gartner, I used to facilitate a supply chain training course that included “The Beer Game” to demonstrate the bullwhip effect to participants. Simply put, the bullwhip effect is a supply chain phenomenon describing how fluctuations in demand at the retail level can cause progressively larger fluctuations in demand at the wholesaler, manufacturer and supplier level (see graphic below).
The bullwhip effect can have a major impact on a specific manufacturer and its customers when it occurs with just a single product, like beer. Imagine this bullwhip effect occurring across multiple value chains and industries. We essentially are experiencing a “ecosystem bullwhip,” a perfect storm that has wreaked havoc in our supply chain.
What are manufacturers doing to address the situation?
We are not going to recover from this supply chain gridlock overnight. So, when our family and friends ask about what companies are doing to prevent this from happening again, here are some strategies and capabilities that manufacturers are focused on to transform their supply chains:
- Re-assessing their global supply network to better balance agility, resilience and efficiencies.
- Increasing supplier network diversity to avoid single sourcing as well as increasing supplier relationship management to reduce risk.
- Implementing end-to-end visibility technology to counteract disruptions to allow faster resolution.
- Utilizing advanced planning capabilities that incorporate real time data to improve demand prediction.
In closing, I hope everyone has a wonderful holiday season with family and friends and if you get bored talking about the supply chain gridlock, I highly recommend playing The Beer Game (do a quick Google search) to really experience the bullwhip effect.
Senior Research Director
Gartner Supply Chain